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Monday, 13 April 2015

New liquidity initiatives benefit Bahrain, UAE Islamic banks

Dubai: The recent launch of one-week Sharia-compliant contracts with the central bank will benefit Bahrain’s Islamic banks because they broaden the range of options available for short-term liquidity management, said Bashar Al Natoor, Global Head of Islamic Finance at Fitch Ratings.

In a recent move the UAE Central Bank started accepting a wide range of sukuk as collateral for banks to access its special lending facility from April 1, 2015. “This will help the UAE’s Islamic banks, which often hold these securities,” said Al Natoor.

Bahrain’s one-week facility is based on a wakalah contract, where the regulator invests cash on behalf of the lender.

Most Islamic Bank liquidity management instruments consist of low-profitability assets, such as cash and central bank deposits. Sukuks are primarily offered as over-the-counter instruments and only a limited amount of them are listed on developed and liquid exchanges.

It is widely expected that the implementation of Basel III and its new liquidity coverage ratio LCR will increase offerings of liquidity management instruments while issuers are likely to list more of their sukuk on exchanges and that some regulators will start to accept sukuk as collateral for liquidity provisions.

Bahrain and UAE-based Islamic banks have so far held excess liquidity either in cash or monthly offerings of central bank sukuk, with maturities between three and six months. This placed them at a disadvantage to conventional banks, which have a wide range of interest-earning liquidity management options available.

“Efforts to develop Sharia-compliant liquidity tools are picking up in several Gulf countries, notably Oman. These tools will be important for Islamic banks to boost their competitive positions, all the more so as the pace of growth in Islamic financial services is outstripping conventional banking growth in the region,” said Al Natoor.

Islamic finance is set to expand as large numbers of relatively under-banked Muslims seek banking services in line with economic development in their home countries, and some countries with large Muslim populations seek to invest their wealth in Sharia-compliant instruments.

The UAE’s Islamic banking assets total $100 billion, the fourth-biggest in the world after Iran, Malaysia and Saudi Arabia, according to Dubai government data. Bahrain has $43 billion. In the UAE, the central bank has expanded the list of eligible collateral for its Sharia-compliant overnight facility to include assets other than the regulator’s Islamic certificates of deposit.

“Regulatory and tax limitations could hold back the development of Islamic banking, as could a lack of workable tools that accommodate Sharia rules. Bahrain and the UAE’s introduction of new liquidity management tools marks a small but important step towards overcoming some of these challenges,” he said.